Following the House’s recent defeat of the bailout bill and heading into tonight’s US Senate vote, speculation has been building that FDIC insurance limits will be raised to $250,000 from $100,000.  While I’m strongly in favor of such a measure, and it will certainly improve consumer confidence in the banking system, I have to ask whether raising the limits should really change anything.

In my mind, banking customers fall into three basic categories: those with deposits significantly less than the current limits, those near (slightly above or below) the limits, and those significantly above the limits.  Lets look at how each of those will be affected by the raising of the limit.

Those with Significantly Less Than Current Limits
These type of depositors are already fully protected, yet seem to be leading the charge to make withdrawals.  Perhaps it’s a lack of understanding of the current rules, but should their confidence rise when limits are raised?   This comment shouldn’t be read as “poor people are stupid.”  First of all, this is the category I myself am in.  Second, even someone with say $85,000 would fall into this category.  You’d have a hard time calling such a person poor.  Is it just misinformation or panic that is causing people in this group to fear loss?  Being fully insured or doubly-fully insured amounts to the same thing: zero risk of loss.

Those Near the Limits
When your deposits are near the limits, you are obviously having some financial success.   I presume that success brings with it some financial intelligence and understanding of the current limits to FDIC insurance as well.  It doesn’t take much of an effort to increase your protection by holding your money in different account types (individual account for you, individual for your spouse, and joint account) to get significantly higher protection limits.  Beyond that, you can easily repeat the process at different banks.  Sure, there’s some overhead involved, but it doesn’t take much to protect even a few million dollars.

Those Significantly Above the Limit
Raising the FDIC insurance limits isn’t going to effect such depositors much.  They are probably utilizing various protection strategies already to deal with the current limits.  Either by handling multiple accounts themselves, paying someone to handle those details for them, or employing other more complicated strategies is already something they are (or should be) doing.

While those near the current limits are most likely to be directly affected by a change, even they won’t see much of a change.  If you’ve already established multiple accounts across a few banks to deal with the old rules, you aren’t going to consolidate into fewer accounts because of the new rules.  Perhaps those best served by raising the limits (or at least discussing the current limits) are people whose money had been at risk who didn’t realize it.  While I do think that confidence in the banking system will be raised as a result of raising the FDIC insurance limits, it still seems that there isn’t much rational reason for that to be the case.